Kemble bond hits new low after Moody's downgrade

4 min read
Sudip Roy

The only outstanding bond issued by Thames Water's holding company has fallen to a record low after Moody's downgraded the security on Wednesday because of growing doubts over dividend payments from its core operating subsidiary.

The agency lowered the rating on a £400m 4.625% May 2026 senior secured bond issued by Thames Water (Kemble) Finance by one notch, to B3 from B2. The outlook remains negative. From 50.375, the high on Wednesday, the move sent the bond to a record low bid price of 48.20 earlier on Thursday, according to LSEG data, before stabilising at 48.45.

Moody's said the catalyst for its rating action came following additional scrutiny from the UK water regulator, Ofwat, on dividend payments to Kemble from Thames Water Utilities Limited. Last week, a report in The Guardian said that Ofwat is investigating whether a £37.5m dividend payment made in October by TWUL, that was ultimately distributed to Thames Water (Kemble) Finance and also another entity, Kemble Water Finance, to repay external debt obligations, breached the conditions of Thames Water's licence. Thames Water has said it had informed Ofwat of its decision to pay the dividend and is now working with the regulator to provide more information.

The rating action "reflects Moody's view that the risk of a disruption to dividend payments by Kemble's core operating subsidiary Thames Water has increased, despite Thames Water not currently being in breach of any explicit lock-up conditions under its financing structure nor licence".

The rating agency said that "the increasing scrutiny of Thames Water's distributions reduces the likelihood of a reliable cash flow stream to Kemble, on which the company relies for its debt service".

Kemble's liquidity situation is likely to come under greater scrutiny if any further dividend distributions are blocked. The company is "obliged to make reasonable endeavours to maintain sufficient cash to cover for 12 months of interest payments", said Moody's. The rating agency said Kemble currently has access to a £150m revolving credit facility, which matures in November 2027. It also had about £20m of cash on hand, as of September, according to Moody's. It reckons the £37.5m dividend payment from Thames Water will be applied to service interest payments, "but would cover only approximately half of the total annual interest requirement on external Kemble debt".

In addition, Kemble Water Finance has a £190m loan facility coming due next April. "Considering Kemble's ongoing interest payments, existing cash and available undrawn amounts under facilities are unlikely to fully support repayment of a £190 million bank loan maturing in April 2024, unless Thames Water can continue to make distributions," said Moody's.

Kemble also has £510m of debt coming due in the second half of 2025, with a further £150m in April 2026, and then the £400m bond the following month.

A further headache

Even without the additional scrutiny of the October payments, Thames Water's ability to continue to provide cash to the Kemble companies could become compromised if the regulated entity's own credit ratings fall below a certain threshold. That threshold is currently Baa3 (or equivalent), with a negative outlook, but from April 2025, the threshold will be raised to Baa2 (or equivalent) with a negative outlook.

Thames Water's senior secured debt is rated BBB, with a negative watch, by S&P, while Moody's has assigned a corporate family rating of Baa2, with a stable outlook.

Much will depend on how convincing Thames Water's three-year turnaround plan that was announced this month proves to be. The plan is supported by a £500m capital injection from its shareholders, which came in the form of a convertible loan.

Shareholders have indicated a further £750m capital injection in the period up to March 2025 but it is dependent on Thames Water meeting certain performance targets. Beyond that next investment, the company is hoping for an additional £2.5bn of support over the next regulatory period of April 1 2025 to March 31 2030.